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Category: Analysis

Introduction

Elsoft Research Bhd (“ELSOFT“) is in the business of research, design and development of test and burn-in systems and application for semiconductors. In simple terms, ELSOFT is in the business of designing and producing automated test equipment (“ATE“) to test a semiconductor-based product.

Business segments

The growth engine of ELSOFT lies in two major segments: automotive and smartphone segments.

In the smartphone segment, ELSOFT develops ATE which tests the LED component of a smartphone.

Financials

I have designed a basis template of ELSOFT’s financials from FY2011 to FY2016.

DATA

2016*

2015

2014

2013

2012

2011

REVENUE (RM’000)

63613

49741

45143

25218

18758

12653

PROFIT (RM’000)

31186

26045

20133

10823

6620

4938

OPERATING PROFIT (RM’000)

N/A

26313

19576

10434

6585

4349

SHAREHOLDERS’ EQUITY (RM’000)

98303

83258

73585

60728

55351

50550

DEBT (RM’000)

13327

9843

7675

4350

5125

5724

RATIO

DEBT TO EQUITY

0.13

0.11

0.10

0.07

0.09

0.11

OPERATING PROFIT MARGIN

N/A

0.52

0.43

0.41

0.35

0.34

OCF RATIO

2.51

1.915

1.954

2.842

1.002

0.553

PROFIT MARGIN

0.49

0.52

0.44

0.42

0.35

0.39

EPS (CENTS)

11.5

9.6

11.1

6.0

3.7

2.7

EPS (ADJUSTED) CENTS

11.4

9.6

7.4

3.9

2.4

1.8

DPS (CENTS)

10

8

7

3

2

2

DIVIDEND PAY OUT

0.86

0.55

0.63

0.5

0.54

0.74

P/E

14.37

13.43

16.10

11.29

10.14

15.38

ROE

31

31

27

18

12

9

Note: * FY2016 is unaudited

From my calculations, the compounded growth rate of the company, between FY2011 to FY2016, is a whopping 36%. Notably, ELSOFT’s profit margin is strong, between a range of 40-50%. This indicates that the company is not in a price competitive industry and/or its products have a competitive edge over similar products in the market.

The automotive segment contributes close to 50% of ELSOFT’s revenue whilst the smartphone segment contributes a respectable 37%. General lighting contributes 13%.

Potentials

Through its R&D, ELSOFT has developed two new products:

next generation test and burn-in solution for the automotive and general lighting segments; and

ATE for solar cells.

This would be, I believe, ELSOFT’s first foray into the solar cell segment.

ELSOFT intends to enter into the medical devices market to develop control boards or embedded control systems for kidney dialysis machines. This will start as soon as ELSOFT obtains an European quality certification for medical devices.

For the 1st quarter of FY2017 (until 31 March 2017), it has a book order of RM27 million already. To the contrary, book order for the 1st quarter of FY2016 was RM21.5 million and a full year’s (FY2016) book order stood at RM49 million.

Conclusion

I like ELSOFT for the following reasons:

High profit margin.

Strong growth rate.

Strong R&D.

Low debts.

Strong cash flow.

Anticipated growth in the semiconductor industry in FY2017.

40% dividend payout policy.

There are still value in its shares despite a 1-year increase of 71%.

I dislike ELSOFT for:

Reliance on R&D.

90% of its customer base is in Malaysia.

Disclose

I own shares in ELSOFT and will continue to acquire more of ELSOFT’s shares.